Why job hopping can hurt your retirement

It's an perennial question in personal finance when it comes to retirement planning: should youcontribute to a Roth IRA or a traditional IRA?
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There’s nothing wrong with switching jobs, especially for a higher salary or better benefits. But jumping from employer to employer could hurt your retirement savings in a few different ways.(Photo: Getty Images/iStockphoto)

Millennials have built a reputation for job hopping. LinkedIn recently ran an analysis of its members and found that those who graduated between 2006 and 2010 had, on average, close to three jobs within their first five years after college.

There’s nothing wrong with switching jobs, especially for a higher salary or better benefits. But if you’re not careful, jumping from employer to employer could hurt your retirement savings in a few different ways.

Waiting periods force you out of the 401(k) game

Millennials with access to a defined contribution plan, such as a 401(k), are the age group most likely to cite ineligibility as their reason for not participating, according to a recent analysis by The Pew Charitable Trusts.

One factor might be waiting periods imposed on new employees. According to the Plan Sponsor Council of America, a nonprofit representing retirement plan sponsors, more than 35% of companies require employees have three months to a year of service before they’re eligible for the retirement plan. Nearly a quarter require a year of service before kicking in matching dollars.

“If you’re switching from job to job and either just meeting the eligibility timeline or falling under it, you’re never going to be eligible to contribute,” says Jane DeLashmutt O’Mara, a certified financial planner with FBB Capital Partners in Bethesda, Md.

Take matters into your own hands with an individual retirement account. The $5,500 annual IRA contribution limit is lower than that of a 401(k), but it beats sitting out retirement saving.

Employer matches might be lost forever

Many 401(k) plans require a vesting period, or an amount of time you must stay with the company before you can take employer-matching dollars with you when you leave.

The PSCA says only about 39% of plans offer immediate, full vesting of matching contributions. Before you give notice, consider the money you’re leaving behind.

Cashing out a 401(k) is costly

If you participated in a 401(k) before switching jobs, you likely have a small balance — small enough that you might be tempted to cash out when you leave. That could easily eat a third of your savings via taxes and a 10% early distribution penalty.

Doing nothing isn’t always a great option, either: You can typically leave money in an old 401(k), but if your balance is less than $5,000, the employer can automatically roll the funds into an IRA. And you don’t want your old company making decisions about your money.

“You need to be diligent about keeping track of old employer plans — know where they are and what to do with them,” says DeLashmutt O’Mara. Roll your 401(k) into an IRA yourself, or into your new employer plan if it allows transfers.